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21 votes
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Fama-Macbeth second step confusion

Then for each month $t$, you run a cross-section regression: $r_{i,t} = \lambda_0 + \hat{\beta}_i {\lambda}_t + \alpha_{i,t}$ Where: $\hat{\beta}_i \equiv [\beta_{i, MktRf}, \beta_{i, SMB}, \beta_{i,...
phdstudent's user avatar
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16 votes
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Philosophical Question about Factor Models

This is actually a rather involved question, and different interpretations exist. A narrow, linear algebra based interpretation is that the stochastic discount factor lies in the linear span of the ...
Matthew Gunn's user avatar
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15 votes
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Rationale of Fama Macbeth procedure

Clarification on the regression coefficients Cochrane (Asset Pricing, rev. edition, 2005) states (p. 247): It it easier to do this in a more standard setup, with left-hand variable $y$ and right-hand ...
skoestlmeier's user avatar
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12 votes

Fama-Macbeth second step confusion

The two step Fama-Macbeth regression works as follows: First, run a cross sectional regression in each period. I believe that you want to estimate risk premia for each of the Fama and French factors. ...
Freddorick's user avatar
12 votes
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Fama-French factor model: why mimicking portfolios?

The innovation of Fama and French's Three Factor Model wasn't in finding book to market ratios forecast returns but in reconciling that empirical regularity with the standard framework of macro-...
Matthew Gunn's user avatar
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11 votes
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how to interpret the GRS F test values?

You don't have a GRS test there that all the alphas are zero. You have a $\chi^2$ test that all the alphas are zero. (The p-value associated with that test statistic corresponds to a chi-squared ...
Matthew Gunn's user avatar
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9 votes
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what does "share codes" in Fama and French (2015) exactly mean?

You just need to check the definition of the variable. They basically represent Ordinary common shares (see below the exact definition).
phdstudent's user avatar
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8 votes
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Fama / French 3 Factor Data Not Giving Expected Results

That's perfectly normal. You are running a regression for a single stock. Single stocks have a lot of idiosyncratic risk (which is what the $R^2$ is capturing). I just run the fama-french regression ...
phdstudent's user avatar
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7 votes
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Interpreting the coefficients of Fama-MacBeth regression

No, you cannot interpret the average return for the factor as the risk premium. The second stage regression is equivalent to building a set of portfolios that have no net investment, a unit exposure ...
Tim Wilding's user avatar
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7 votes
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How would you in practice use factor models (like Fama French) to make decisions?

Not exactly. People use those type of models (such as the fama-french model) to evaluate their portfolio. Literally, you run a regression of a stock/portfolio agains the FF factor model to understand ...
phdstudent's user avatar
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6 votes

How exactly do I calculate and interpret factors in Fama-French model?

The clearest hands-on explanation I have seen so far is the following: Bernstein, W.: Rolling Your Own: Three-Factor Analysis Everything is explained very clearly and step-by-step with Excel. ...
vonjd's user avatar
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6 votes
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Why were Fama/French Momentum Factors discontinued in 2016?

To preface, just a minor quibble: French still tracks the momentum anomaly elsewhere on his library, under "Sorts involving Prior Returns"; it's just no longer part of the core FF framework ...
David Addison's user avatar
6 votes

How to use factor models for prediction?

You kinda mentioned in your questions, but the predictive model is essentially a lagged version of the "factor model". Part of the problem comes from the subscripts, the model itself doesn't really ...
Will Gu's user avatar
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6 votes
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Fama MacBeth cross-sectional Regression

Preliminary The main result of the Fama-MacBeth procedure is to calculate standard errors that correct for cross-sectional correlation in a panel. It is a commonly used method due to it's easily ...
skoestlmeier's user avatar
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6 votes
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Comparing Investment Style with Fama French 3 Factor Model

How do the investment styles compare? KIS 10 is the only one with substantial exposure to Value and Size, the other two have negligible exposure to these two factors. GS1 is typical of a portfolio of ...
Alex C's user avatar
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6 votes
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Are Fama French Factors market neutral?

The factors are not constructed to be market neutral. The factors are constructed from 6 subportfolios sorted by book-to-market and size. You can read more about how the factors are constructed at ...
Tim Wilding's user avatar
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5 votes

Fama-French Data from daily to monthly returns

You're compounding correctly but the discrepancy is not just because of rounding. SMB and HML are formed as averages of 6 and 4 different portfolios, respectively. As French's website explains, this ...
Cyurmt's user avatar
  • 111
5 votes

Could someone teach me how to construct the portfolios by compute (like using R, Excel or Eviews)

First of all, it is not conceivable to do all that work by hand! You are crazy to have just thought it! Second, if you want to repeat your work with different datasets, I suggest you to use R, since,...
simmy's user avatar
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5 votes

Fama/French momentum replication: risk-free rate missing on one of the legs?

Out of curiosity, I took a quick stab at replicating the Fama-French portfolios using CRSP data. I seem to be getting numbers reasonably close to Fama-French, so I think the issue is on your end. ...
Matthew Gunn's user avatar
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5 votes

Interpreting Fama-French factors for the German stock market

Preliminary This answer provides evidence (and confirms your supposition!) that the HML factor in Germany is no longer rewarded with higher returns in the cross-section of German stocks. From July ...
skoestlmeier's user avatar
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5 votes
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Are the FFC factors equal or value-weighted?

Regards FFC, you refer to four portfolios, which are formed by using different weightings: The market portfolio, which is a value-weighted return with end-of-previous market cap. as weights: The ...
skoestlmeier's user avatar
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5 votes
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Interpretation of Fama French portfolio

This is a quite broad question, but as requested, i would like to provide you four recommendations. First, testing any portfolio sorting-strategy, it is common in academics to account for ...
skoestlmeier's user avatar
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5 votes
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What is NYSE breakpoint as used by Fama French?

NYSE is the abbreviation for New York Stock Exchange Most financial researchers like Fama/French use the CRSP database for US financial data. It is maintained by the University of Chicago's Booth ...
skoestlmeier's user avatar
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5 votes
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How to do Fama French (1993) cross sectional regressions? A few questions

You say: At this point I don't really get any further, as I am unsure about which "cross section" is being talked about here. Since I have created 25 portfolios, I can only have all in all ...
phdstudent's user avatar
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5 votes
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Why exposure to the profitability factor increases investment premium?

As @skoestlmeier and @noob2 commented there's much research going on about the profitability anomaly. Firstly, there are different ways of measuring profitability. Novy-Marx (2013, JFE) uses gross ...
Kevin's user avatar
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5 votes
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Are Fama-French returns in percentages?

In my experience working with Ken French's data library, a "1.37" in the return field would correspond to a 1.37% return (with rounding to the hundredths place). You can of course do some ...
Matthew Gunn's user avatar
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4 votes

Calculating fund alpha using Fama-French 3 factor model?

In the long run, you'd probably be better off learning a real programming language like Python, R, or MATLAB. While you can do this in Excel using mmult, ...
Matthew Gunn's user avatar
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4 votes

Why do Fama French use NYSE breakpoints in the factors creation

The CRSP tape covers NYSE stocks since 1926. The Amex and Nssdaq stock data kicks in later (1960s). Therefore if you are going to use one consistent method to break stocks into market value groups it ...
Alex C's user avatar
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4 votes

Is it possible to adapt Fama French Model with a 6 factor Model?

A conceptual problem with ESG as a factor is that ESG criteria seem to me about preferences over how firms operate rather than preferences over when cashflows occur? I don't think this is a strong ...
Matthew Gunn's user avatar
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4 votes
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How would one go about verifying a factor model

Just finding factors based on regression is a poor idea. A statistically significant factor in all honesty may mean nothing. Read the fama French original paper, they were not just trying to find ...
Dhruv Mahajan's user avatar

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